Monthly Archive for September, 2010

According to a study by Zillow.com, most mortgage applicants do not qualify for the best mortgage rates available. So those with bad credit needn't feel like ugly stepchildren; they are in a very large boat these days. Even more shocking is the fact that one third of folks out there may not be able to qualify for ANY mortgage. There are several reasons for this:

1. Credit scores have dropped during the recession. Incomes have been scaled back; jobs have been lost.
2. On the flip side, mortgage companies have tightened their underwriting guidelines. Those with scores below 620 may not receive a single offer from mainstream lenders.
3. Mortgage insurance is much harder to get. If you have less than 20% down, your options may be limited, especially if you are trying to buy a condo in Florida. You may have to confine your search to FHA-approved projects and stay withing FHA loan limits.
4. FHA is tightening up its guidelines too. It has not only imposed credit limits of 580 to get a 3.5% down loan and 500 to get any FHA loan, but it is withdrawing its approval from lenders with high default rates, even if they adhere to FHA guidelines. This has prompted lenders to add overlays -- that is, stricter guidelines than those required by FHA -- in order to minimize the chance of losing their approval.
5. Subprime lenders have largely exited the marketplace.

So what should a would-be homeowner do?

First, try looking where lenders specializing in credit-challenged borrowers are -- this site, for example. Fill out the form and see what you qualify to get or what you need to do to get qualified.

Second, work on improving your credit score. Every twenty point increase gets you a .12% improvement in your mortgage APR according to Zillow.com.

Third, get a larger down payment. You may not be able to get an FHA loan with a 600 credit score and 3.5% down. But you may with 5% or 10%. The fastest way to increase your down payment is to find a cheaper house to buy. Then, negotiate with your home sellers to get them to pay your closing costs. That leaves you more money for a down payment.

If you can find a house with a payment lower than the rent you pay now, you have a better chance of getting a loan approved because you have a history of successfully paying that much each month.

Take a home buyer class approved by HUD. It shows you are serious and increases your chance of being successful with your home buying experience.

All of these things can increase your chance of getting approved for a mortgage and having a positive experience when you buy your home.

Are you in the US Army and do you need help paying your mortgage? You may get help now, thanks to a new partnership between Fannie Mae and the Army. The purpose of this initiative is to help those in the service or military families suffering from a death or injury who are having trouble paying their mortgage. Under Fannie Mae's "Unique Hardships" guidelines, military personnel will be eligible for a mortgage payment forbearance of up to six months. You may be eligible if:

• You are ineligible for or do not want to get a refinance.
• You are facing a financial hardship due to either an injury or loss of spouse in active duty.
• You are several months behind on your mortgage payments.

After the forbearance period has ended, you still need to repay the amount that was reduced or suspended. However, there are options for doing this:

• Move the payments to the end of your mortgage, which will lengthen the term.
• Make a one-time payment for the amount.
• Add a specific amount to your payments each month until the arrearages are repaid.

What if you are still undergoing hardship after six months?

If you are still struggling with your mortgage payments after the forbearance period is over, you may be able to qualify for a modification that would permanently change the terms of your mortgage.

Jeff Hayward, senior vice President of Fannie Mae’s National Servicing Organization, says that "No family impacted by a death or injury in the line of duty should have to face the additional burden of foreclosure as a result of the hardship."

Service members or surviving spouses who may be eligible for the special forbearance should contact their mortgage company. With the forbearance, a mortgage company can reduce or suspend monthly payments for service members or surviving spouses for up to six months. The credit bureaus reporting on these families will be suspended to minimize any derogatory impact to their credit scores.

The number for the hot line military families can use to get more information is 877-MIL-4566, or you can go to visit www.KnowYourOptions.com/Military for information.

Experts everywhere have been slinging around a lot of blame for the mortgage crisis; one of the "culprits" has been interest-only mortgages. The problem with IO loans, analysts claimed, was that borrowers who chose to make an interest-only payment for five or ten years were unprepared for the inevitable increase in payment when the loan was re-cast to pay off completely in twenty-five or thirty years. And in a certain context, that makes sense -- if you can't afford the payments on a fully-amortizing thirty-year loan, why would you be able to repay that same amount over a shorter period once the interest-only period ends?

For example, the interest-only payment on a $400,000 loan at 5% is $1,667 a month. The full payment is $2,147. And if the interest-only period is five years, the $400,000 balance must be amortized (paid off) over 25 years -- on year six, the payment increases by $672 from $1,667 to $2,338. An unprepared homeowner could find himself or herself unable to pay this much. Imagine that five years ago, before the recession, it was not unreasonable to believe that one's income over the next 60 months would increase significantly. If you made $5,000 a month back then (which would make a $1,667 payment doable but not a $2,147 payment), and you received a 5% raise each year, you'd expect your income to be about$6,400 a month by the time your payment increased.

But this expected regular increase in pay has not happened for a large portion of the population; in fact, many young hopefuls are unemployed instead of happily ensconced in a lucrative career.

Then, many others expected that their homes would increase in value and that they'd be able to sell at a smart profit by the time the expected payment increase hit, or that they'd be able to refinance to a new 30-year term or even a new interest-only loan. A $400,000 home that increased in value at 5% per year would then be worth over $500,000 by the time the mortgage changed.

And we know that for many this expected scenario did not materialize either. At worst case, there were folks facing diminished incomes and with homes worth much less than was owed on them.

But were the interest-only loans the cause of the debacle? What about resetting adjustable rate mortgages, which some have suggested were instrumental in bringing on the housing crisis? Or prepayment penalties, which have been blamed by legislators for keeping people in mortgages that they couldn't afford? New mortgage laws aim to keep loans with many popular features like these away from borrowers. Would such provisions have averted the housing crisis?

Apparently not, found San Diego State University's Michael Lea, who examined mortgage products in 12 different countries and found that mortgage design didn't necessarily lead to higher defaults elsewhere, even in those countries that had greater home-price volatility. The research concluded that underwriting practices which resulted in loan approvals not based on borrowers ability to repay the loans were the culprits, not loan provisions themselves.

For example, sensible underwriting would dictate that the borrower be able to handle the expected increased payment with current income. You don't give an unemployed person a loan based on the probability of him obtaining a job in the future, so you shouldn't grant a loan that is unworkable unless there is a future increase in income or assets. That's just silly.

So expect that proposed legislation won't do much to prevent the next crisis, but it will probably restrict your ability to get the most appropriate loan for your situation and is also expected to increase the cost of your next mortgage. You may want to refinance your bad credit mortgage now while it's still cheap to do so. Complete the form on this site to see what's available to you.

If you have bad credit and need a refinance or want a new home loan, your best friend may be a mortgage broker. Mortgage brokers have access to a wider variety of mortgage programs and are better able to help a less than perfect borrower find the right loan. While working for a mortgage broker, I would sometimes send out a loan application package to over twenty lenders before I found one that would approve my borrower. If I had worked for a direct lender or bank I would only have had a few programs to offer and would not have been able to help some of these clients.

Mortgage brokers: On the endangered species list?

Unfortunately, many brokers are leaving the business. This isn't all bad; some are getting out because of new regulations that won't let convicted felons sell mortgages (yay!), and some have not been able to pass their newly-required standard licensing exams. But others are leaving because the contraction in mortgage lending has made it difficult for smaller lenders to stay in business, and because government-imposed net worth requirements mean only larger outfits will survive.

This will affect people with bad credit more than people with good credit

Good credit mortgages practically underwrite themselves. They are processed electronically through automatic underwriting systems. When you have good credit, you can go to whatever lender offers the lowest rate and get instant approval and close quickly. When you have bad credit, service is more important, and a good broker can make sure that you don't pay any more for your bad credit mortgage than necessary.

When shopping for a bad credit mortgage, contact at least one mortgage broker. That person may give you access to a lot of programs that you won't otherwise get.

According to the Center for Responsible Lending, over half of those folks who got home loans for people with bad credit in 2006 could have qualified for cheaper mortgages, either FHA or conventional. Some activists contend that this was due to predatory lending practices, that is, lenders steered folks into loans with higher rates to get paid higher commissions. Which shows that many writers and even analysts don't really understand the lending industry.

That's not how mortgage pricing works.

Any loan has several prices. Par pricing means the loan costs nothing. Then the lender or broker adds a charge for its services -- this can be called an origination, underwriting, processing, loan documentation, administration, or other fee. Sometimes there is a combination of lender charges. But the cost of providing the money at par is zero.

Now, suppose you want a lower interest rate? You can choose discount pricing, and you'll pay discount points (each point is one percent of the loan amount) to get a lower interest rate.

But what if you want lower fees? You can choose rebate pricing. In exchange for accepting a slightly higher interest rate, you get a rebate, which can be used to pay your lender fees. So, as an example, a 30-year fixed rate might be 4.25% at par, costing zero plus a 1% origination charge. It might be 4.0% at a cost of 2 discount points (2%) plus the origination charge, and it might be 4.375% at no points and a 1% rebate to cover the origination fee. That's how mortgage pricing works.

So, if a lender wants to make more money from you it has to change its pricing and charge more for a given interest rate. That's why we always recommend that you shop with several lenders for your mortgage to make sure that you get a good deal.

Commissions are no larger on bad credit mortgages than on prime loans.

The difference is that the rates are higher to compensate the lender for taking on extra risk. If the chances of default are higher because your credit is bad, the only way you will get someone to lend to you is by paying a higher interest rate. So if the mortgage rate offered is 7.25% instead of 4.25%, the commissions are paid the same way. 7.25% might be a par rate, 7% might cost a couple of points, and 7.5% might get you a no-cost loan. But the broker or loan officer makes the same commission.

So, what about the people who could have qualified for prime financing?

Most bad credit mortgage lenders don't offer loans for people with good credit. And most good credit lenders don't do subprime lending. It's a completely different business model. So if you come in looking for a mortgage, they will sell you what they have. If you aren't sure what you qualify for, try FHA or Fannie / Freddie lenders. And fill out the form on this site and see what you are offered. When you cover all the bases, you'll know what kind of rates are on offer for someone with your credit profile and can make your best deal.

Unless you've been buried in a vault somewhere for the last three months, you've probable heard that about half of mortgage modifications fail and the borrowers end up in foreclosure anyway. What you might not have heard is the reason for these failures. And many who publish this news have apparently not thought it worth ...

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